Journal of Banking & Finance Vol. 156 2023
Decreasing returns to scale and skill in hedge funds
Abstract
In this paper, we investigate value creation by hedge funds using Berk and van Binsbergen's (2015) value-added. We find that, on average, a hedge fund manager extracts $0.76 million per month from the market. We provide strong evidence of persistence in value creation by hedge fund managers. Of three skill indicators—skill ratio, fee ratio, and total compensation—we find that total compensation best identifies the skilled manager out-of-sample. Investors in value-creating funds benefit from a better risk–return payoff. While hedge funds operate in a less competitive market than mutual funds, incentive fees do not indicate greater skill. The value that hedge funds can extract from the market depends on both the profitability and scalability of the investment strategy.
- DOI
- 10.1016/j.jbankfin.2023.107009
- Volume
- 156
- Pages
- 107009
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref